Business Context and Reporting Period
Company: Scorpio Tankers Inc.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2015
Business Overview: Scorpio Tankers provides seaborne transportation of refined petroleum products and crude oil worldwide. As of March 17, 2016, the company operated a fleet of 78 wholly owned tankers and 11 time chartered-in tankers, with a weighted average age of approximately 1.5 years. The company primarily operates vessels in spot market-oriented tanker pools (Scorpio Group Pools) and on time charters.
Key Financial Metrics (Year Ended Dec 31, 2015)
| Metric | 2015 Value | 2014 Value |
|---|---|---|
| Vessel Revenue | $755.7 million | $342.8 million |
| Net Income | $217.7 million | $52.1 million |
| Earnings Per Share (Diluted) | $1.20 | $0.30 |
| Operating Cash Flow | $392.0 million | $93.9 million |
| Total Assets | $3,523.5 million | $2,804.6 million |
| Total Debt (Current & Non-Current) | $2,050.0 million | $1,571.5 million |
| Cash and Cash Equivalents | $201.0 million | $116.1 million |
| Shareholders' Equity | $1,413.9 million | $1,162.8 million |
Operational Metrics:
- Average Daily TCE Revenue: $23,163 (up from $15,935 in 2014).
- Average Number of Owned Vessels: 72.7 (up from 31.6 in 2014).
- Dividends Declared: $0.495 per share for the year.
Material Changes vs. Prior Period
- Revenue Growth: Vessel revenue increased 120% to $755.7 million, driven by a significant expansion in the fleet (average owned vessels increased from 31.6 to 72.7) and improved market conditions (TCE revenue per day increased 45%).
- Profitability Surge: Net income increased 318% to $217.7 million. This was primarily due to higher operating income from fleet expansion and improved rates, offset by higher financial expenses ($89.6 million vs. $20.8 million) due to increased debt levels to fund the newbuilding program.
- Debt Expansion: Total debt increased to $2.05 billion from $1.57 billion to finance the delivery of 27 new vessels in 2015 and ongoing newbuilding contracts.
- Asset Base: Total assets grew 26% to $3.52 billion, reflecting the addition of new vessels and drydock costs.
- One-Time Items: The company recognized a $1.2 million gain on the sale of its investment in Dorian LPG Ltd. in 2015. In 2014, the company recorded a $51.4 million gain on the sale of VLCCs under construction, which did not recur in 2015.
Guidance, Outlook, and Risks
Outlook and Strategy:
- Newbuilding Program: The company has contracts for 12 newbuilding product tankers (8 MR and 4 LR2). Four LR2s are expected in 2016, and eight MRs in 2017. Remaining yard installments total approximately $318.9 million as of March 17, 2016.
- Dividends: The Board declared a quarterly dividend of $0.125 per share payable March 30, 2016. Future dividends remain at the discretion of the Board and are subject to debt covenants.
- Repurchase Program: A $250 million securities repurchase program is active. As of March 17, 2016, $164.5 million remained available.
Key Risks and Contingencies:
- Market Volatility: The tanker industry is cyclical. Revenue is heavily dependent on spot market rates, which are volatile and influenced by global economic conditions, oil supply/demand, and bunker prices.
- Debt Covenants: The company has significant indebtedness with restrictive covenants (e.g., net debt to capitalization, EBITDA to interest expense, loan-to-value ratios). A decline in vessel values or charter rates could trigger covenant breaches, potentially leading to debt acceleration.
- Impairment Risk: While no impairment was recorded in 2015, the company noted that 30 vessels had fair values less than carrying amounts. Management determined no impairment was necessary based on "value in use" calculations, but future declines in charter rates could trigger impairment charges.
- Regulatory Compliance: Compliance with environmental regulations (e.g., IMO Ballast Water Management, sulfur emission limits) may require significant capital expenditures.
- Related Party Transactions: The company relies on related parties (Scorpio Group) for commercial and technical management and participates in related party tanker pools.
Investor Verification Checklist
- Debt Covenant Compliance: Verify current compliance with financial covenants (Net Debt/Capitalization, EBITDA/Interest) given the high leverage and potential volatility in vessel values.
- Impairment Sensitivity: Review the sensitivity analysis regarding discount rates and future charter rates used to justify the lack of impairment charges on vessels where carrying value exceeds market value.
- Newbuilding Commitments: Confirm the status of the $318.9 million remaining obligation for newbuilding vessels and the company's ability to fund these without breaching liquidity covenants.
- Related Party Fees: Assess the impact of management fees paid to Scorpio Group affiliates (commercial, technical, and administrative) on operating margins.
- Charter Expirations: Monitor the expiration of time charters and the re-chartering rates for the fleet, particularly as the company transitions from newbuilding delivery to full commercial operation.